Spencer Fane LLP Logo

Manufacturer’s Corner: Should You Opt Out of the CISG?

So far, the Manufacturer’s Corner has usually assumed that your contract will be controlled by the law of a U.S. jurisdiction that has adopted Article 2 of the Uniform Commercial Code. But that may not always be the case.  In some instances, you may sell non-consumer goods to a company that is deemed to have its place of business outside the United States, and that place of business may be in a country that is a party to the U.N. Convention on Contracts for the International Sale of Goods (“CISG”). Although the provisions of the CISG are similar to the provisions of Article 2, there are important differences both in the substance of the rules and in some procedural matters.

Many manufacturers use their standard terms and conditions to opt out from the CISG, and the CISG generously includes a provision that allows parties to do just that. As with many other provisions in your terms and conditions, however, we submit that you should not opt out of the CISG merely because many others do it; it should be the result of a deliberate decision.

Before examining some of the differences between the CISG and Article 2, we want to highlight one important practical distinction. Lawsuits brought under the CISG may be brought in federal court, regardless of the amount of damages claimed.[1] Claims under Article 2, however, can typically only be brought if the parties are citizens of different states and the amount in controversy exceeds $75,000 (or they are part of a class action and the amount in controversy exceeds $5 million). I consider this an independent benefit of CISG – if you’re sued, you can remove the case to federal court if you want.[2]

With that out of the way, let’s turn to some of the substantive differences between Article 2 and the CISG.

First, Article 2 generally requires that sales of goods for the price of $500 or more must be set out in a written, signed contract.[3] That’s not a big deal by itself – we’re assuming here that you have a written agreement, since we’re talking about your terms and conditions. But it’s important when you consider that any modifications to a contract subject to the wriring requirement must also be written.

The CISG is different, in that it simply does not require a written contract.[4] Therefore, if it is important to you that modifications to the contract be made in writing (I suggest that it is important), opting out of the CISG is wise.

Second, aswe have written before , Article 2 has some interesting things to say about what terms control when a purported acceptance includes terms that vary from or add to those in the offer to buy. In that instance, one of the essential inquiries a reviewing court would make is whether the offer “expressly limits acceptance to the terms of the offer.” The CISG, on the other hand, provides that if an acceptance includes additional terms, or terms that vary from the offer, it is deemed a rejection and a counteroffer. Like Article 2, it continues to provide that if the terms do not materially alter the agreement, the new or different terms become part of the agreement.[5]  Unlike Article 2, however, the CISG mandates subsequent rejection of the new or different terms, rather than allowing prior rejection by limiting acceptance to the terms of the offer. Assuming you’re the seller, therefore, the CISG may well be better for you.[6]

Third, in the event of a lawsuit, Article 2 does not typically allow evidence of pre-contract negotiations if that evidence contradicts the terms of an unambiguous contract. The CISG, however, does allow that. Thus, if your contracts are typically the result of careful negotiation, this factor weighs in favor of Article 2.

While considering whether to opt out, remember that the CISG does not require you to opt out of its provisions in full – you can select which will apply and which will not.[7] So you should also consider whether you want to accept the benefits of the CISG while rejecting those provisions that do not benefit you. In this instance, you would be wise to expressly disclaim those provisions of the CISG that you do not want to apply, and instead incorporate the provisions of Article 2 that are to replace them.[8]

Determining whether to opt in or opt out of the CISG requires nuanced analysis, and it is no surprise that many manufacturers simply throw up their hands and opt out. We urge you not to do that, but instead to examine the issue carefully so that you reach the right decision, not necessarily just the easy one.

[1]  See, e.g., BP Oil Int’l, Ltd. v. Empresa Estatal Petroles de Ecuador, 332 F.3d 333, 336 (5th Cir. 2003).

[2] The lawyers reading this may think that diversity jurisdiction is a given if the CISG could possibly apply, assuming the amount in controversy exceeds the $75,000 threshold.  Not so.  Remember that if a party has more than one place of business, the relevant place under the CISG is “the place of business which has the closest relationship to the contract and its performance[.]” If your client is based in Chicago and incorporated in Delaware, and it sells goods to the Ontario branch of a company incorporated in Delaware, there’s no diversity jurisdiction, but the CISG would still afford you access to federal courts under federal question jurisdiction.  Also, this allows you to circumvent the forum defendant exception to the diversity statute.

[3] A slightly different rule applies to sales between merchants, but it’s not important for our purposes here.

[4] This is not entirely true.  Some contracting states have opted out of this no-written-contract-required provision.  Those states are Argentina, Armenia, Belarus, Chile, China, Hungary, Latvia, Lithuania, Paraguay, Russia, and Ukraine.

[5] Incidentally, the plain language of the CISG aside, courts applying the CISG to deal with conflicting contract provisions have reached differing conclusions on how to deal with them, much as U.S. courts applying Article 2 have.

[6] Remember that your customer’s purchase order is typically the offer, while your invoice typically contains the terms of your acceptance.  Under the CISG, your terms should control, provided that they do not materially alter the terms of the offer.  What is “material” is beyond the scope of this post (though some things that are considered material are set out in the CISG text itself), but an interesting question is whether an opt-out of the CISG would be considered material.  U.S. cases hold that forum selection clauses are material under the CISG because they relate to settlement of disputes, so I would also expect a U.S. court to find a choice of law provision material too.  See, e.g., Chateau des Charmes Wines Ltd. v. Sabate USA Inc., 328 F.3d 528, 531 (9th Cir. 2003).

[7] With the exception of the written contract issue discussed above, if you are dealing with a buyer whose place of business is in one of the countries listed in footnote 5

[8] But be careful if you and your counterparty do not agree on the same substitute law.  A federal judge in New York surely managed to make both parties angry when he held that, where both parties attempted through their forms to opt out of the CISG, but their forms differed on what law applied instead, the judge just went ahead and applied the CISG anyway.  Hanwha Corp. v. Cedar Petrochemicals, Inc., 760 F. Supp. 2d 426, 430-31 (S.D.N.Y. 2011).